Clear Eyed Capitalist

Archive for the ‘Homework RePost’ Category

I wrote this roundup of opportunities to supplement with finance-specific education for the social business types I know. As I work to figure out where social investing meets social enterprise I’ve identified one key gap: the skills taught for wealth/portfolio management are covered in CFA/CFP type courses and do not overlap AT ALL with banking. Community Investing and Community Economic Development pools are all banking. So a barrier to increasing community investing (take note, Social Investment Forum!) is that most wealth managers have no ability to assess the opportunity. Calvert Community Investment Notes are the one intermediary I know of that links the two by building a pool of funds, doing the underwriting, and wrapping it up and selling the notes like traditional securities. Otherwise, so far, Community Development Finance Institutions are restricted to Banks and a few daring foundations for funding.

The best advice I’ve gotten on this one: if you want to help people with financial planning, become a CFP, if you want to create or evaluate financial products, become a CFA. A CFA manages portfolios and analyzes stocks/bonds/funds to decide if they’re good investments.

Many traditional MBAs get a CFA in tandem with their MBA because of the overlap between an MBA accounting/finance curriculum and the CFA study program. To become a CFA you have to study for and pass 3 tests. You also have to work in the field. The tests are offered every December and every June and the prep courses run about 18 weeks. After reviewing several and asking advice I’m currently leaning towards Stalla. Seattle U offers a Saturday course that starts in the fall, they use Schweser. Seattle has a very active CFA society chapter with frequent lectures, a book club and some community service. My experience to date is they have little to no SRI component or awareness.

A CMA is focused on the skills you want within a single firm to not just do tax reporting (CPA) but make management decisions about efficiency and profitability and controls.

This seems to be a 2nd tier certification – note that Stalla and Schweser have prep courses for the CPA but not the CMA. A friend who had it said it’s more recognized on the East Coast than here. There are local chapters of the IMA (Institute of Management Accountants) in Bellevue and Seattle (and looks like they’re merging right now, so that could be good). It’s the Mt Rainier Chapter in Tacoma that makes me think “These people and what they do rock!”. OMG I had my mind blown at their “Excel Geeks Rejoice” meeting last March. The CMA just switched from a 4-exam to a 2-exam system.

Banking is a different animal than financial management – lending, loan pools, tracking the performance of a single company and estimating their ability to repay debt and pricing risk and then how does that impact the performance of your whole loan portfolio. CFAs do wealth management but have no idea how to evaluate the risk/return of CDFIs, which as I noted above I’m finding is a barrier to more investment in community development financial institutions/loan funds.

NeighborWorks is a national organization focused on strengthening local community development programs with an emphasis on housing. They have a number of certificate programs including “Housing Development Manager Certificate”, but also “Community Economic Development” and “Community and Neighborhood Revitalization”. I attended one institute and took 2 of the 5 courses needed towards the “Community Economic Development” certification. As someone with a strong math background I found them a little weak, but the perspective on what makes a main street work and how to support local businesses was still interesting. In general NeighborWorks programs are geared towards nonprofit employees who are primarily community focused. They’re also very East Coast focused – most of their training institutes are in Philly or DC, sometimes Dallas or Chicago. I lucked into one they had in Portland or I might not have bothered.

While I was in the NeighborWorks 2-day class, folks in that class spoke with intimidation (ooo, sounds good!) of a similar but more intense 5-day training course given by the National Development Council.

They offer certifications as an “Economic Development Finance Professional”, a “Housing Development Finance Professional”, and a “Rental Housing Development Finance Professional”. For the Economic Development certificate they have four 5-day courses: Economic Development Finance, Business Credit Analysis, Real Estate Finance and The Art of Deal Structuring. They also offer a revolving loan fund course, focused on how to be compliant with Community Development Block Grants.

They offer a Development Finance Certified Professional designation: “The DFCP Program is designed to produce graduates with a comprehensive knowledge of development finance concepts, tools and applicability as well as a deep understanding of the entire development finance spectrum.” Courses in tax increment finance, the New Markets Tax Credit program, bond financing, and revolving loan funds.They also don’t make it up to the northwest, San Diego is where I’ve thought I might go sometime.

Angel Investing/VC

You regular readers have probably already figured out that I think the hype and attention GREATLY outweighs the success/usefulness of angel investing. I don’t think this is a good way to learn how to build sustainable businesses. But in the interest of completeness…

The Kauffman Foundation developed and forked off a number of resources including a series of courses on angel investing (who got rich in the gold rush – was it the miners… or Levi’s?) http://www.angelcapitaleducation.org/ I’ve taken a few and they offer good advice (step 1: you need to build a portfolio because so many individual deals will fail).

Another program that spun off is a kindof VC internship/Fellowship. It seems mostly aimed at taking people with deep industry experience and bringing them into VC firms. Read the bios of the current class to get a sense of who gets into this. http://www.kauffmanfellows.org/fellowship.aspx

Philanthropy/Wealth Management

Rounding out my roundup of “how to understand money” I’ll add these:

Institute for Private Investors – https://www.memberlink.net/ twice a year they offer a week-long Wealth Management Program on how to manage your money & assorted pool of advisors. Once with Wharton and once with Stanford (august). 10K for the course, but if you need it, you can afford it. They have a bunch of ongoing stuff but focused around SF and NYC.

The Philanthropy Workshop – http://www.tpwwest.org/ a year long program with a series of retreats to help wealthy folks develop a focus/plan for effective philanthropy.

Conferences/Associations of potential interest

The Community Development Venture Capital Alliancehttp://www.cdvca.org/ has an annual conference that I found interesting (though it was in DC and so half the conference was about lobbying – I ran into that with AEO as well, I think now for conferences that move around I’d skip the DC incarnation if you’re there to learn.) They have a book worth buying called the CDVCA Equity and Near-Equity Investment Primer.

Association of Enterprise Opportunitywww.microenterpriseworks.org – while I mentioned it. A trade association for microenterprise lenders and training organizations. They have an interesting annual conference – lots of info about how to run your microenterprise nonprofit – managing loan pools, helping people with credit repair, financial literacy stuff, software platforms to manage your loan portfolios. that kind of stuff.

Opportunity Finance Network – http://www.opportunityfinance.net/ the trade association for Community Development Financial Institutions like Enterprise Cascadia or Community Capital Development. They’re also an East-Coast focused org but in Nov. 2010 their conference will be in San Francisco!

Thanks to Alex Moore for suggesting I take this BGI-internal post and share it on my blog. He’s a pretty fine blogger on these topics himself.

Bordewich, F.M. (1996). Killing the White Man’s Indian: Reinventing Native Americans as the end of the twentieth century. New York: Doubleday.

The “white man’s Indian” in the title of the book refers to archetypes such as “drunk Indian”, “noble savage” and “selfless caretaker of the earth” that obscure the real complexity of Indian identity and complicate relations to the rest of the United States. This book is a history of those relations organized around various themes: the changing attitude of majority government towards Indians, the legal conflicts over defining who counts, the history of land relations, Indians and their identity as environmentalists, conflicts over Indian remains and artifacts, alcoholism, and education. The book is written in a casual register in that it uses an episodic style: each theme is separated into a chapter and introduced with a story opener. Once the story opener lays the outline of the conflict, the chapter goes into more depth about relevant history, describing significant persons in personal detail, mentioning relevant legal acts, and including related stories about experiences of other individual Indians in other tribes. The chapters generally close with a conclusion of the opening story.

In the introduction the author explains his choice of the term “Indian”, as opposed to Native or Aboriginal, as the term most currently used in institutions and by tribes themselves. Indians differ significantly from other minority groups in that they have reservations and tribal status. The theme of the book is that clarity around our shared history is necessary for us to move forward.

Our shared history starts out in conflict for land. Although the colonies and the early U.S. Government made various efforts to restrict settlement and reserve land for Indians, invariably those agreements were not respected by settlers in search of land, and often treaties and agreements were simply betrayed by the government. The key story in this section is one of lost opportunity: the Cherokee Nation in the southeast made an effort at assimilation: they adopted a constitutional government and they adapted many American ways. The new US Government essentially sold them out to the state of Georgia in 1802 by agreeing to evict the Cherokees in return for Georgia relinquishing claims to modern-day Alabama and Mississippi. The author notes that precedent dates back to the Scots being evicted from the highlands with a change in rule, and the Acadians being booted to Louisiana from Canada. In 1828 gold is discovered in the heart of Cherokee land and Georgia formally annexes the land and begins revoking Indian rights. The Cherokees sued and lost in court, then supporting missionaries sued and won but to no avail, in 1828 federal troops hearded the Indians into camps and begin the Trail of Tears, marching them off to Oaklahoma. This process marked a clear shift in relations from ambiguity and sometime equality to clear subjugation by the U.S. government. During the 1800s Indians were simply regarded as a barrier to Manifest Destiny in need of extermination. Ranchers could actually get government funded off-season work killing Indians. This history is largely overlooked but the effects carry through to today. The Cherokees did eventually recover as a tribe and the author interprets this as a parable of persistence, renewal and adaptation.

The question of identity has long been a tricky one: whites have both romanticized and demonized the Indian image, and the federal government has wanted simple tests for benefit determination once they committed funds in a shift from extermination to management. Who is an Indian? Possibilities include: someone who wears feathers and beads, someone who lives on a reservation, someone who is enrolled in a tribe, someone who self-declares on the census, someone who matches the Hollywood ideal, someone who obeys tradition, or someone who can prove descent or a blood quantum level. Current laws are actually contradictory – the definition of an Indian for the purpose of distributing benefits is not the same as the definition of an Indian to get product artisan labeling in some states. Tribes at the time of colonization actually varied considerably in size and structure, and over time they’ve been decimated, scattered and formed into new alliances. The government has recognized tribes and dropped recognition over time.

Relations with tribes finally begin to shift significantly in the 1970s, in a way that impacts all the issue areas covered in the book. In 1975 the Indian Self Determination Act formally shifts administration of Indian benefits from the Bureau of Indian Affairs to the tribes themselves, and in 1977 a review commission asserts that Indian tribes are sovereign political bodies and relations should be founded on principles of international law. While this has been the basis of much forward movement, most importantly allowing Indian Tribes to finally control their land and resources, the transition from wards to self-determination is a rough and still evolving story. Like any local government, tribal governments have been vulnerable to corruption and mismanagement, but tribal members have had little success appealing to the federal government for intervention. Details of legal jurisdiction have dragged on through multi-year legal disputes: do Indians have jurisdiction over other Indians on their land?; do Indians have jurisdiction over white property owners within reservation boundaries? (such private property was created during a period in the 1930s when the government attempted to convert Indians away from communal property ownership); can Indians enforce old treaty rights?; do Indians have legal claim to their own artifacts that were essentially looted in the 1800s? The 1970s through the 1990s have been a period of fairly steadily strengthening Indian rights and claims, to the point where tribes now exercise real power over water and land, and whites are beginning to lose out in conflicts. But without a shared understanding of history, it’s difficult to come to a shared understanding of current settlements and many whites feel bitterly wronged.

Two challenging aspects of Indian identity stand out as part of their struggle today: the definition of Indians as the original caretakers of the environment, and a historically molded pattern of defining their identity in opposition to whites. These two frameworks create challenges for maintaining Indian identity while building economic power based on the natural resources Indians now control such as water, fishing rights, land and forests. Building that economic power also requires education, political negotiation, and using white-developed expertise—tools with a long history of ultimately being used to the detriment of Indians. A mix of history and environmental ideology leads many individual Indians to take isolationist positions and creates barriers to the negotiation necessary for economic integration that can alleviate poverty and underdevelopment. The challenge is to align that development with “the resanctification of the earth that has become for a great many Indians a medium of salvation that far outweighs its economic cost, a way to reconnect with the tribal past and with the lives of ancestors who, during generations of systematic cultural repression, seemed beyond reach across a vast divide.”

This book was recommended to me by an associate of the Squaxin Island Tribe. [2013 update: at the time of this post the book seemed out of print, but it is now available.] www.bookfinder.com is my favorite used book search engine.

We read a series of mini-case-studies (UVA-ENT-0100) put together by Andrea Larson of The Darden School at UVA, guest professor at BGI this quarter. As I read through the cases a few themes emerged for me: First, in product reformulation, supply chain collaboration is key. Several cases are about premium products standing out in commodity categories. Branding matters, and creating a technical metabolism (wherein materials are truly recycled to become new of what they were old, instead of being downcycled to a different, less recyclable product) is key to true sustainability. Another theme that emerged is that goal setting is everything – if you believe that it’s not possible to be both cost efficient and green then you won’t get there – you have to set it as a goal. Finally, when working to be green – don’t just think about the product, think about the whole product lifecycle.

Supply Chain collaboration is key – several of the cases talked about the need to work with all members of the supply chain to design a new product. Climatex Fabric was an example of a company needing to find mill partners and yarn twisters that would work with a new process. NatureWorks PLA plastics a product that is challenged by as-yet not having deep enough supply chain relationships and control to allow it to ensure GMO-free product. Without control of the supply chain, they have limited control of the product. In the Nike case, they are described as essentially a “complex global supply chain” management company. To protect their brand, they had to develop “a new dimension to supply chain management.” Not only are they setting standards for their suppliers to meet, they’re supporting NGOs to develop the organic cotton industry – investing to create supply chain partners for the future.

Standing out in a commodity category – interestingly from the case studies I see two slants on this – Method (household cleaners – available at Target) is an example of a company that used their sustainability plus sexy branding to stand out from a commodity category and be visible to the customer. They used brand identity to create a premium product, so they could command a premium price, so they could be environmental without making their environmentalism their primary selling point. This way they could reach out to mass market instead of just the environmental niche. Coastwide Labs, making cleaners for commercial janitorial settings, is an example of an environmental product that stands out from a commodity market, but it seems slightly reversed in that they designed to be an environmental product and their sales are driven by customer demand (one example: municipalities passing Precautionary Principle purchasing ordinances), thus allowing them to command a premium. So in one case, they’re using sexy branding to drive demand to pay for sustainability, in the latter case demand is driving sales and allowing them to command a premium for sustainability. I wonder what their relative volumes and margins are, I’d guess Method is higher volume/lower margin than Coastwide, compensating for age of the company. EcoWorx carpeting is described as breaking out in a commodity category, but their case is almost one of being forced to play catch up when a competitor (Interface) takes a successful lead with sustainable product, as well as being driven from behind by the kinds of industry voluntary agreements that form to avoid regulation.

Goal Setting – Shaw Industries, makers of EcoWorx, is an example of setting a goal to become infinitely recyclable and getting there because of the set objective, though it took them many years and almost a million dollars in research. The Coastwide labs example is a particularly good one – they lowered costs overall not by making the product itself (cleaning solutions) cheaper as they made it less toxic, but by making the packaging cheaper & the dispensing more efficient. Those two improvements were most likely available to them independent of making the product environmentally friendly. Business is all about priorities, and those priorities stayed low on the list until the goal of making environmentally friendly products raised the need for lowering costs which raised the priority of those cost reduction options. It was the setting of the goal that made the difference. NatureWorks PLA is another product that was created by first setting a goal to create it.
Nike has also set long term goals and developed metrics that lead them to explore all areas of their product supply chain and internal corporate operations.

The whole lifecycle – Method standing out in their commodity category with sexy packaging, Coastwide cutting packing costs as part of cutting overall costs to support their price point – both are examples of how the packaging is just as important as the product in forming the whole proposition. The textile examples of EcoWorx and Climatex are cases where the end-of-life for the product was a key part of the proposition, and the supply chain examples show how the pre-life of the product is a key part. When going sustainable, taking a total lifecycle approach is essential.

I found this a little bit like “The Tipping Point” in that it’s full of interesting anecdotes, many of which I’ve heard before, but by the end of the book I’m not clear that it all adds up to something. So doing a book review was helpful. At some level, this is a book about economics – how we synchronize our activities, often via money. I started off on audiobook and that was somewhat enjoyable. The author reads the opening, and then a professional voice reads the book. He reads fairly slowly though, so I ended up switching to the book itself.

At the book’s core is the contention that under the right circumstances, groups can be smarter than the smartest individuals among them, and the book is about the situations where that is true. The author supports the anecdotes with academic studies.

In the opening the author identifies 3 types of problems:

Cognition problems – ones that have right answers (at some point in the future, the answer can be judged correct or incorrect), like who will win the Superbowl or who will win the next election. Voting is an established way of aggregating judgments.

Coordination problems – getting people to work together like traffic, or connecting buyers and sellers. Coordination problems can be solved by everyone working in their self interest once the rules are set up – like traffic driving on the right hand side of the road in the US. Social Norms and conventions minimize coordination problems.

Cooperation problems – people need to work together like a in a tax system, or a salary negotiation. Cooperation problems require a broader definition of self interest and the use of trust. Fortunately, studies show that people care about fairness and strong reciprocity is a deeply embedded norm that helps with cooperation. Capitalism needs transparency & trust to minimize transaction costs.

There are three conditions that help a group be wise:

Diversity – particularly in thinking and experience. Someone less “smart” can make the group smarter because they’re less redundant. Diversity is more important when trying to generate alternatives than when trying to choose among a fixed set, usually in cognition problems. Diversity can actually cause problems in solving coordination problems (fewer shared norms & conventions) or cooperation problems (less trust).

Independence – members of the crowd need to rely on their own thinking and experience to make their decision, rather than changing their opinion based on what other members of the crowd think. While this is critical for cognition problems, it’s less helpful for coordination or cooperation problems.

Decentralization – related to the above two, decisions are made where the knowledge is. For good decision making in large groups or communities, aggregation of the decentralized decision making is the next key. It’s important to aggregate judgments, not just raw data, to maximize taking advantage of decentralized knowledge.

Dangers that make groups unwise:
Lack of diversity and independence can lead to groupthink and herding. Poor leadership can create confirmation bias – a tendency to evaluate new data against an already made decision. Dissent, conflict and independence are key to good decision making. Too much dependence in our decision making can lead to bubbles and crashes.

My net: Diversity is key to good decision making, but making decisions at scale requires coordination and cooperation which is challenged by diversity. Figuring out how to aggregate the diversity into coordinated cooperation without losing the value that was generated is a key challenge we face